San Diego Housing Bubble News and Analysis

If a bank I owe a mortgage to goes out of business, then I don't have pay anymore, right? Thanks.

And Jim Rogers would be correct. If Congress passes this hogwash, it will just like flushing $700 billion (plus) down the toilet. The thieves on Wall Street will simply take their pardon and laugh all the way to their vacation homes...............then, they'll devise a way to fuck us again.
If I wanted to live in a socialist country, I would move to one. Our founding fathers are probably spinning in their graves.

I don't know. My understanding is that the problem is people/banks are hording cash. Banks, specially the big ones, are afraid to lend to each other and and to companies. With out credit, the economic engine will seize. I've read that knowledgeable people don't know for certain that no bailout means massive depression, nor that a bailout will work for sure, but are you willing to take that

Word is that Dems have extracted concessions like equity in the firms bailed out. According to this blog entry http://tnr.com/politics/story.html?id=4b..., The administration had acceded to Democratic demands that the government get shares in the firms it rescues, oversight mechanisms, and limiting what the financial titans who got us into this mess could pocket from this rescue. Maybe not as good a deal as Buffet got at Goldman, but not horrible either.

I read elsewhere that Obama is angering the Liberal base by wanting to exclude bankruptcy protection from the bailout.

So maybe, congress can pass something that lessens the risk of financial collapse for all of us without enriching the greedy bankers and saddle us with debt.

I listened to a NPR on the drive home and they were talking about the political end of the bailouts and the election. They repeated that the calls and emails to Washington are 100-1 AGAINST the bailout. One of the commentators called it the most hated piece of legeslation to pass in decades. It really feels that just about NOBODY wants this, but they dont know what else to do.It is fear driving this, nothing else.

The latest revolt about all this is actually from the house Republicans. They don't want to do this, and if things keep falling down they want to be in a "I told you so" position. If they work, then they can say they supported it only after it got in a position to actually be effective. (dont you just love polspeak!) either way they think something will happen by next week, but they are worried because the backlash from the voters is threatening to look nasty.

I say vote them all out. Part of the problem is that our elected representatives only worry what we say in a crisis. It would have been alot more effective to worry about this 6 years ago instead of 6 DAYS ago.

Thanks for posting that video of Betty Liu interviewing Jim Rogers.

He's brilliant on the financial markets and FUNNY too. She's smokin' hot and plenty smart herself. Great interview.

I don't know. My understanding is that the problem is people/banks are hording cash.

Wrong.

The banks are deliberately freezing the credit markets to try and push for the government into giving them free money.

F-them. They don't want to lend; let them go under.

MadeInTaiwan said "With out credit, the economic engine will seize."

Really? Are we still beating that drum? I've heard for the past 8 years, mainly from the Bush camp, that oil and credit are the life blood of the economy. This is patently false, and I wish those misconceptions would go away. Savings and technological innovation are the life blood of a sustainably prosperous economy. Oil and credit are poison to America, leading only to costly interventionist war, deficit spending and speculative bubbles.

Well said, underdose!

What nobody is talking about is the DEFLATIONARY side of credit...it's called debt.

Credit is used to bring purchases forward, removing the purchases from the future. As an example, if we all had to save to buy a house, we would be too old to enjoy it, so mortgages were created to enable us to buy first and pay later. The purchase that would have occurred many years later can occur today, instead.

Initially, credit looks like a good thing as purchases and transactions accelerate. This makes the supply-siders want to expand credit, as they are usually the winners (lenders and businesses win during a credit expansion). Prices go up, and more credit is needed to buy the same item (inflation).

But credit has an equal and opposing side, too -- deflationary debt. For each dollar that is spent today, a dollar (PLUS INTEREST) is taken away from future spending as that debt needs to be serviced. The more you expand credit, the more indebted people become, and it can grow for a long time until the debt can no longer be serviced, even temporarily, as the payments just become to enormous for the debtor to handle with his/her earned income (and he/she is no longer able to qualify for more debt because of this, eliminating the option of using debt to pay off debt).

Then comes the downside...as we experience debt destruction in the form of defaults and bankruptcies -- and lost purchasing power. Lenders, not knowing where the damage is or where it will end, will slow lending and hoard more capital to protect against additional losses from the defaults.

At this point, you can pump all the money you want at the deflationary effects, but IMHO, the deflation must match the inflation that caused it...unless you literally print money (no debt offset) and give it to THE DEBTOR to service his/her debts.

What the Fed and Treasury are trying to do now is print money to replace the repudiated debt. $700,000,000,000 is a drop in the bucket. The credit bubble really began to take off in the early 80s, and the inverse may well take us back to those levels.

They are trying to save the banks when they should really use that money to backstop the FDIC, SIPC and PBGC as well as provide zero-percent loans to insurance companies so they can pay their regular property and casualty claims. It is this money (in "safe" accounts) that will provide the floor for the downturn.

Additionally, they should enact a work program because the deflationary side of credit really is destructive. We have a lot of work to do in this country. The credit/housing bubble has distracted us from the many productive things we could have spent our money on over all these years -- infrastructure and R&D in energy, transportation and health care technologies.

We will not work our way out of the depression/recession until we take the focus OFF of housing/credit and shift our resources to the REAL economy. The idiots in D.C. do not get this.

Just to add to my already too-lengthy post, the obvious effect of "just printing money" is massive inflation, quite possibly hyper-inflation.

(But you already knew that!) :)

I did not make it clear, probably because I was not clear myself, on how exactly "credit freeze" will bring the economy to a grinding halt.

I heard another NPR segment co-produced with This American Life yesterday. They spoke to a few a people. One of them is the financial officer of Terminex's parent company. The company uses commercial paper (called the most liquid part of the financial system) almost daily. The simplified explanation is to borrow 99,000.00 and return 100,000.00 a few days later. This is how many many companies make payroll and pay creditors. It is supposed to be a very boring part of finance, often handled by clerical level people when borrowing, seized up. His company could not burrow anything. He thought that our financial system would collapse if it went on for few more days. That is what got Pualson and Bernankie so spoofed. Then they talked to a banker at the receiving end of these loan requests. According to him, the reason the commercial paper market seized is because the oldest Money Market fund "turned a buck", lost money, earlier in the week. Money Market pays extremely low interests, but is not supposed to loose money. The fact that one did spooked everyone, so no one is willing to lend.

What the feds/treasury are really trying to do is to instill sufficient confidence so that normal lending will occur, not the over leveraged crap that got us into this mess.

A poster thought this credit freeze is bankers withholding lending to force a bailout, I have to say that is a bit too "conspiracy theory" for me. Do you really thing bankers have that much control over each other?

Anyways, I don't play a financial genius, even on internet. I am only passing along things that make sense to me.

I did not make it clear, probably because I was not clear myself, on how exactly "credit freeze" will bring the economy to a grinding halt.

I heard another NPR segment co-produced with This American Life yesterday. They spoke to a few a people. One of them is the financial officer of Terminex's parent company. The company uses commercial paper (called the most liquid part of the financial system) almost daily. The simplified explanation is to borrow 99,000.00 and return 100,000.00 a few days later. This is how many many companies make payroll and pay creditors. It is supposed to be a very boring part of finance, often handled by clerical level people when borrowing, seized up. His company could not burrow anything. He thought that our financial system would collapse if it went on for few more days. That is what got Pualson and Bernankie so spoofed. Then they talked to a banker at the receiving end of these loan requests. According to him, the reason the commercial paper market seized is because the oldest Money Market fund "turned a buck", lost money, earlier in the week. Money Market pays extremely low interests, but is not supposed to loose money. The fact that one did spooked everyone, so no one is willing to lend.

What the feds/treasury are really trying to do is to instill sufficient confidence so that normal lending will occur, not the over leveraged crap that got us into this mess.

A poster thought this credit freeze is bankers withholding lending to force a bailout, I have to say that is a bit too "conspiracy theory" for me. Do you really thing bankers have that much control over each other?

Anyways, I don't play a financial genius, even on internet. I am only passing along things that make sense to me.

Here is an LA Times link that connects the money market fund loss with Lehman Brothers http://www.latimes.com/business/la-fi-cr....

Again, you may want the banks to die, but in a mass stampede, many innocents, you and I included, may get trampled.

"We will not work our way out of the depression/recession until we take the focus OFF of housing/credit and shift our resources to the REAL economy. The idiots in D.C. do not get this."

Well said, CA Renter!

Here's a fun little thought experiment. Imagine all the capital poured into the Iraq war and the housing bubble and bust. Now, imagine instead all that money going to building solar panel plants and putting the new panels on every rooftop in America. For the forseeable future our power would be essentially free (not really in accounting terms as the panels get depreciated, etc., but in spirit), would not run out, could power plug in hybrid cars and power industries that, with cheap power, could compete with the cheap labor in China and other countries. We would be truly wealthy, not phony wealthy because our houses are expensive and our credit cards are maxed out, but truly producing abundance. The ninnies in DC still are clinging to the idea that "consumerism" is the definition of wealth.

MadeinTaiwan said "This is how many many companies make payroll and pay creditors."

I would personally call this a bad practice. If a company is handling its cashflow that close to the wire, they are either mismanaging things are playing a pretty risky game to greedily try to squeeze a little more profit out. This is the equivalent of me depleting my bank account on beer right before rent is due, withdrawing cash on my credit card to pay rent, then when payday hits a few days later paying off my credit card. When a single person does this, we call it irresponsible. When a company does, well, that's just the way business is done. It strikes me as a double standard.

MadeinT,

One of the recent govt actions was to create a backstop to support Money Market funds. Implementing that would free up the commercial paper markets, relieving the problem you describe.

For some strange reason, this MM backstop has not been implemented by Treasury. In the meanwhile, we are all made to feel the symptoms of a credit squeeze.... which makes you and many other members of the electorate anxious for a massive bailout. See some comments in the recent threads on the Calculated Risk blog for more on this.

I suspect that we are being stampeded into a bailout.

Your understanding of how credit is used by business is limited.. you need to broaden your view. Comparing a company's need for credit (especially a small company) to you blowing your wad on beer and not being able to make rent is not an accurate analogy.

I own a fashion co. that uses and relies on credit all the time. In business when opportunity knocks you have to take advantage of it. This means sometimes borrowing to fill large orders and yes even occasionally borrowing to make payroll.

Effective small business owners are ballsy and do what they have to do bring in profits and keep their staff employed. If the credit dries up the result will be larger companies with deeper pockets capturing more market share while small businesses lay people off and go under.

Businesses that depend on debt are definitely going to suffer in this environment. But that's not such a bad thing necessarily. It's healthy for the economy to purge marginal and inefficient businesses occasionally.

In any event, even if it were desirable to continue making short-term loans available to small businesses, I don't see how buying $700 billion in bad mortgage debt is going to help. If the underlying assets being borrowed against are overvalued, banks are still going to be reluctant to lend. The only way to fix this crisis is to allow asset prices to get back to their natural levels. All of this interference by government is just pushing that day further into the future which is just going to prolong the crisis.

Imagine all the capital poured into the Iraq war and the housing bubble and bust. Now, imagine instead all that money going to building solar panel plants and putting the new panels on every rooftop in America.
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Exactly, underdose!

It sickens me that everyone is whining about housing prices going down...which makes housing more affordable and takes a smaller portion of a family's wages, so they can spend their money and/or invest in more productive things.

Trillions of dollars...lost.

"Your understanding of how credit is used by business is limited.. "

Not true. I totally get, and even applaud, the manner in which you use credit. Please don't read too much into my criticism of Terminex running at redline. It sounded like they do this every month as a matter of practice, not an emergency option to seize a rare business opportunity. They are a big company, and have no need to be running their cashflow that tightly. It seems to me to be a case of the common misconception that "risk implies reward, and risk does not entail any actual risk." If Terminex is running risks like this, they should, in fact, be at risk, not me the tax payer who does not participate in the profits when the gamble doesn't backfire.

It sounds to me that you are one of few people in America using credit correctly, as capital investment to grow your business. I never said that credit should go away entirely. It should be backed by savings, and used responsibly.